Financial Products for Hedging with Vest Co-Founder Jeff Chang

Barry speaks with Jeff Chang, President and Co-Founder of Vest. They discuss his journey into founding Vest. They also discuss Jeff's views on the benefits of hedging along with with the growth in popularity of ETFs. They also talk about the creation of financial products geared towards hedging. See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

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• 1:09Speaker 02

  Bloomberg Audio Studios. Podcasts, radio, news.

• 1:17Speaker 02

  This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

• 1:23Barry Ritholtz?

  On the latest Masters in Business podcast, I sit down with Jeff Chang. He's co-founder and president of Vest. They are a firm that specializes in defined outcome investing, buffered ETFs. They try and remove the uncertainty of outcomes of your investing by using options and derivatives to come up with very, very specific products. I thought our conversation was fascinating, and I think you will also. With no further ado, my podcast with Jeff Chang.

• 1:56Barry Ritholtz?

  Jeff Chang, welcome to Bloomberg.

• 1:59Speaker 04

  Great to be here and thanks for having me.

• 2:01Barry Ritholtz?

  Well, thank you so much for coming. I'm kind of always fascinated by people who have unusual or diverse backgrounds. You in particular, US Naval Academy and then an MBA from Georgetown, is that right? What was the original career plan?

• 2:19Speaker 04

  So I grew up in Annapolis. The original career plan was to be, you know, be part of the Navy and unfortunately I got medically discharged for asthma and then decided to pursue more of a business path and that's what kind of led me to Georgetown. And then after Georgetown, I actually, right after, I actually always wanted to start my own company, right? In fact, this is kind of a funny thing. Most people don't know this. I've never actually said this. When I first started, I actually started a flat screen TV company in 2012, OEMing them from China. And do you remember back in the day, like flat screen TVs used to be like 25, 30,000 dollars?

• 3:01Barry Ritholtz?

  Oh yeah, when they first came out, they were crazy.

• 3:03Speaker 04

  Yeah, so I was in DC selling those. In fact, I remember selling TVs to Reagan National Airport. So when you like look at what terminal you are back in the early 2000s, those were Jeff Chang TVs that were there. I think another client was Six Flags, like when you...

• 3:20Barry Ritholtz?

  The wait, how long the wait is?

• 3:21Speaker 04

  Yeah, yeah, exactly, exactly. But then, you know, as TVs became further and further down, I was like, hey, that's not the business I want to be in.

• 3:28Barry Ritholtz?

  All commoditized, why do you want to be there?

• 3:31Speaker 04

  Yeah, all commoditized. So it taught me a lot about starting a business on, you know, that and about life is that I realized that I needed actual hard skills that created

• 3:46Speaker 04

  a value add. And also, the other component was I also realized that doing like accounting books, I didn't pay too much attention in accounting. So I actually for six months went and studied for the CPA exam and took CPA exam to be accounting, which was actually a two-fold... Uh, kind of reason, I think, uh, one of my mentors, uh, once told me is that like, hey, there, there is, um, for the better word, there's FU money and FU skills.

• 4:13Barry Ritholtz?

  Right.

• 4:13Speaker 04

  Right? Um, you don't have that money. So make sure you build skills in which you're not always beholden to other people. And if you thought about it, that, you know, the two guaranteed things in life is death and taxes.

• 4:26Barry Ritholtz?

  Right.

• 4:27Speaker 04

  Uh, and so in my, uh, head was, I didn't want to be an undertaker, but I could take the CPA exam and ensure that.

• 4:34Barry Ritholtz?

  Participate in taxes.

• 4:35Speaker 04

  Exactly, exactly.

• 4:37Barry Ritholtz?

  A growth industry.

• 4:38Speaker 04

  So that was the reason why I took CPA exam was that like, hey, I know I would never starve, uh, because, you know, after the failure of my first firm, I was like, hey, uh, there's, you always have to have at least a safety net. And that also, uh, informed me that when I started a new company, accounting is actually extremely important, uh, when you're starting a, a firm or even a startup for that matter. And it actually came, uh, to pass that that has been a very, very important part of, of my career path as well.

• 5:06Barry Ritholtz?

  So, so it's certainly a useful set of skills.

• 5:09Speaker 04

  Yeah.

• 5:10Barry Ritholtz?

  But I'm going to assume the first business didn't fail because of bad accounting.

• 5:14Speaker 04

  Yeah.

• 5:15Barry Ritholtz?

  It's just a hyper competitive market.

• 5:17Speaker 04

  That's right.

• 5:18Barry Ritholtz?

  With razor thin margins and as stuff, as economies of scale came out.

• 5:23Speaker 04

  That's right.

• 5:24Barry Ritholtz?

  The market just dies for that.

• 5:26Speaker 04

  Yeah. And that really informed me is that you have to have an edge. I, I think, um, over the 13 years of founding this company, I noticed that there were actually key features that I noticed, even going through Y Combinator, my classmates and people that built very successful companies, they had very common, um, characteristics for their success. Right? Um, in fact, I, I had Asian parents. They optimized for intelligence.

• 5:52Barry Ritholtz?

  Right.

• 5:53Speaker 04

  Which was very, uh, you know, you get straight A's, you play the violin or the piano and you kind of go through that.

• 5:58Barry Ritholtz?

  They're optimizing for Ivy League admission is what you're, you're implying.

• 6:01Speaker 04

  Exactly, exactly. Um, and, or be a doctor for that matter.

• 6:06Barry Ritholtz?

  It's so different from Jewish parents.

• 6:07Speaker 04

  Yeah. Exactly. So it was, uh, and then. As kind of over the years, I realized that the optimization, like if, you know, when I have kids, because you know, I don't have kids, at least none that I know of, but if I did, I would optimize for, actually, number one is grit, like that in that grit is the not giving up, like, like, you know, your company fails, what's the next thing? Like, you know, you pick up yourself from your bootstraps and you, you, you get up and go. It's almost like the thing is like, as an example, my parents didn't let me play video games.

• 6:40Barry Ritholtz?

  Uh huh.

• 6:41Speaker 04

  But I realized video games, actually, if, if you introduce grit, like, you know, if you play Call of Duty, like, I was the guy that when I played Call of Duty in my twenties, I would buy the, the headphones that would let me hear whether or not someone's behind me, because whatever it takes to win, like that type of, you, you ever see that kid that does not want to lose, that like fails, but then gets up and figures out a way to win? That is grit.

• 7:04Barry Ritholtz?

  That resilience is more important, right, than anything else.

• 7:07Speaker 04

  And then the second is, I realized that nothing in this world can be done alone. That success requires you to have partnerships, friendships, and know people that can help build great things. Great things don't come by yourself. And that's what I think second is influence. Your ability to let people see your dream and believe in your dream. Think about this, like, if you're starting a company, not just selling your product requires influence, like convincing your first investors, your first employees to quit their jobs, their high-paying jobs, to make almost nothing and take equity. That's, talk about like selling a dream, that's influence. Like, think about, you know, some of the greatest entrepreneurs out there, they, you know, you probably heard like Steve Jobs

• 7:51Speaker 04

  as a reality distortion field. You know what that is? That's influence, right? That is one of the key things, I think, when, when you're looking at business, influence is such a, a key thing of, of something that required to have success, because like I said, nothing in the world is done alone. This third, which comes back to my point, is creativity, the ability to spot things that other people don't see, right? To basically be, to see opportunity, to see things, to combine things together and have that opportunity. And then the last, if you combine it, is intelligence. If you do all four, and I can give you examples of people who are immensely successful just with grit.

• 8:32Speaker 04

  And by the way, it's in that order, influence, grit, influence, creativity, and last is intelligence.

• 8:39Barry Ritholtz?

  So, so I wanna, I wanna stop you there for a sec because I wanna spend time going over Y Combinator. I wanna talk about VESS, but before we get there, I mentioned the Naval Academy of such an unusual background. Talk a little bit about what your experiences were like at places like Freddie Mac, the World Bank, FBR, and ProShares. That's such a diverse set of experiences. What did you take away from that life experience and, and how did that ultimately lead you to launching your own firm?

• 9:13Speaker 04

  Yeah, so I could tell you, one of the best things about what the military teaches you is not just teamwork and looking after the people next to you and really making a commitment. But there's also another thing is work ethic. Like, I could tell you that I'm a morning person. I didn't grow up a morning person, but it's like 5:00 AM, I'm up. And the funny thing is, my girlfriend's a night person. She's like, how are you like sprightly at 5:30? And I was like, that is actually learned behavior, right? So that was like, kind of the first thing of, of learning grit and, and, you know, tackling the day early on, making your bed, things, those small things in life, I think had been really,

• 9:55Speaker 04

  I'd say, important and, and, you know, kind of keystone in, in that process. The second is actually, when I first started my first job at the World Bank after trying to start my company, I had to translate energy companies in China, and I had two problems. Number one was I didn't, my Chinese wasn't good enough. And secondly, my accounting wasn't good enough, hence the CPA came in. I was like, at least I gotta learn one. And then I cut over to Freddie Mac, and if you remember during the 2002, 2003 timeframes, when Freddie Mac went into restatement. So as a certified public accountant, I was extremely sought after at that time.

• 10:37Speaker 04

  So I worked at Freddie Mac and I realized that I really wanted to, I read Liar's Poker by Michael Lewis, and I realized that I, hey, I really wanted to trade mortgages. So I started to-

• 10:49Barry Ritholtz?

  Which, by the way, he said he is horrified because he thought this was a portionary tale.

• 10:55Speaker 04

  Yeah.

• 10:55Barry Ritholtz?

  And all it did was encourage more people to go to Wall Street.

• 10:58Speaker 04

  Totally. Totally. Reading that book really made me want to be, you know, what he said in the book, big swinging, right? Like, everybody, it was just such a fun story. It almost painted Wall Street in a specific way, but it was just the interesting part. And by the way, it also got me into reading Fubozzi about fixed income, about the mortgage market. And then I wanted to be a trader. So, you know, I studied for the CFA exam. I got my CFA charter. I didn't know that would lead me to over a decade of teaching CFA.

• 11:32Barry Ritholtz?

  Right.

• 11:33Speaker 04

  But that was really fun to do that and kind of give back. But, so, trading mortgages, Freddie and then FPR, I got to trade during 2008. I got to have a front row seat to seeing the, you know, Bear Stearns, Lehman. You know, I remember trading repo during the 08, September 08. It's the month I lost all my chess hair in one month. But it was fascinating. I mean, that's what I thought finance was like. So then, you know, later on, I cut over to convertible bonds and options. Then the flash crash hit in 2010, which was, by the way, I'd never seen an entire trading desk stand up within one minute of everybody's like, what's going

• 12:18Speaker 04

  on? So, yeah, I got to see a lot of Wall Street in my 20s and 30s. It was, it was definitely a formative time of understanding, you know, kind of what made capital markets tick and understanding, and also understanding the pitfalls, the hubris of finance that, you know.

• 12:39Barry Ritholtz?

  Well, that has to be the big takeaway from 08, 09, is that markets go up and down. And if you're leveraged,

• 12:49Speaker 04

  Exactly.

• 12:49Barry Ritholtz?

  it's a problem. And if you're highly leveraged, it's usually pretty fatal.

• 12:53Speaker 04

  Yeah, exactly. And, you know, and disasters are always clear in hindsight, right? And you You look back and you're looking at 20, 30% default rates. You're like, why, that would, that would have been so clear in your mind when you started to look at some of the data. Uh, and so that was really formative. And the other component is, is kind of like what Warren Buffett says. You always know who's not wearing pants when the water goes out.

• 13:18Barry Ritholtz?

  Yeah, when the tide goes out.

• 13:18Speaker 04

  Yeah, exactly. And so I always, uh, I, I'd say, think about, hey, if the tide goes out, make sure, um, the, the money we manage for our clients that we got pants on, right?

• 13:31Barry Ritholtz?

  Risk management turns out to be more than just a phrase. It's really important if you're running other people's money.

• 13:37Speaker 04

  Exactly, and it's something that you live and breathe. And, uh, what I actually, uh, uh, you know, a lot of our, uh, investment process is to try to get our clients to, to understand that. And you utilize kind of a lot of the tools that we build are basically pants. Like, you know, when the water goes out, make sure that, that you have something there because of uncertainty.

• 13:58Barry Ritholtz?

  That's to say the very least. So, so let's talk a little bit about that. You come out of this, uh, experience on a desk through the financial crisis. You launch Vest in 2012. What was the motivator? What led you to say, hey, I think we could do this better?

• 14:14Speaker 04

  Yeah, so I had a very short stint at ProShares where I met my co-founder Karan Sud. Um, he worked on the structuring desk at, at Barclays. And, um, we talked about, um, you know, like, hey, let's start our own firm. And then our first idea was, uh, going to be, uh, you know, buffers, like, like downside protection, uh, that we saw in the structured note market. And by the way, this actually segued into the mortgage, uh, crisis because in 2008, the largest issuer of structured notes was Lehman Brothers.

• 14:47Barry Ritholtz?

  Mm-hmm.

• 14:47Speaker 04

  Right? Like you have a hundred percent protected, uh, note and then now you're standing in bankruptcy court. So, uh, that was a big change in the industry. I think the structured note industry went from 120 billion to 30 billion in, in that timeframe from after the 2008 crisis.

• 15:02Barry Ritholtz?

  I'll tell you a funny story. I was a market strategist at a brokerage firm in, uh, oh, two, oh, three. And we got pitched a, um, downside protected SMA. And, uh, I was just sitting in, in a conference room. Hearing this pitch, what are the, any questions? And I didn't ask the obvious question that I thought, which was, well, great. The Nasdaq's down 81%. Where were you five years ago? Who needs this now? But the question I asked and got called into the corporate counsel's office for was, hey, what about counterparty risk? How do we know that you guys are going to be there to make the trade good?

• 15:45Barry Ritholtz?

  Sir Lehman Brothers has been here for 189 years. It'll be here long after you're gone. I'm like, okay. No, it's an actual risk that no one was even discussing. It was just assumed. So it turned out that, you know, counterparty risk is a real, is a real thing.

• 16:04Speaker 04

  Oh, yeah, it's a very real thing.

• 16:06Barry Ritholtz?

  So we're going to talk a little more about vest and buffer funds in a moment. But I just want to get the timing right and talk a little bit about your experiences at Y Combinator. You launched vest with your co-founder in 2012. You joined Y Combinator in 2015. What, what led you to saying, hey, let's, let's see if we can hook up with the guys over at Y Combinator?

• 16:31Speaker 04

  Yeah, so that's the thing in finance is there's not too much innovation, right? Cause it's a lot of regulation and so on and so forth. And so even at our company, we, we always, even our identity today is still, you know, Silicon Valley meets Wall Street, right? I always think that like in my mind, if, you know, someone in Silicon Valley were to come into our business, they could end up in jail, right? Or if Wall Street ends up in, in Silicon Valley, you know, you, you might be, you know, just end up in a ditch, cause you know.

• 17:04Barry Ritholtz?

  You'll get run over for sure.

• 17:05Speaker 04

  Yeah, exactly. Because the end of the day is, you know, we went four years with no income.

• 17:10Barry Ritholtz?

  Wow.

• 17:11Speaker 04

  Right? Like lived off our Wall Street bonuses, me and my co-founder Kron Su. Like we didn't get paid for, you know, four plus years to found this company. Like that's how much you have to, the grit and the belief in something. And, and that culture really, really, I think, comes out of kind of startup, kind of the Silicon Valley area. Y Combinator at the time.

• 17:33Barry Ritholtz?

  Run by Paul Graham, is it?

• 17:35Speaker 04

  Uh, Paul Graham, at that was the first year Paul Graham stepped down and Sam Altman, when I showed up-

• 17:42Barry Ritholtz?

  Ah, gotcha.

• 17:43Speaker 04

  Was president of Y Combinator, so uh-

• 17:45Barry Ritholtz?

  2015?

• 17:45Speaker 04

  Yeah, 2015, yeah. Um, Sam was president of Y Combinator, and for the folks out there that don't know, so YC, uh, you know, similar to like a college application, you, you fill out an online college application, you actually don't need a company, they, they help you form, uh, the firm, and, uh, you know, the companies that have come out of that program, you know, Airbnb, Reddit, Coinbase, DoorDash, uh, OpenAI was funded by YC Research, so all of that, uh, all of those firms came out of, uh, YC, so, uh, in fact, I think, I read a book called The Launchpad-

• 18:20Barry Ritholtz?

  Uh huh.

• 18:20Speaker 04

  Which talks about YC, the companies that are there, I mean, the first class of YC included Sam Altman, uh, Justin Khan, who founded Twitch, and Alexis O'Handon, who founded Reddit, and I think there was like, uh, correct me, maybe nine companies, I mean, that's a all-star cast, if you ask me-

• 18:40Barry Ritholtz?

  Yeah, absolutely.

• 18:41Speaker 04

  Uh, for a class, um, and so, it was definitely someplace that we wanted to be around, there weren't a lot of finance, uh, firms, in fact, uh, Vesta's the largest asset manager to emerge out of YC, uh, so it was definitely something to try, something different, um, and really in, um, get into the Silicon Valley, uh, and really push the innovation, uh, within, within finance.

• 19:04Barry Ritholtz?

  I don't know if this is still the case, but a couple of years ago, the standard deal was something like half a million dollars for 7% of the company, plus a three-month program of building, iterating, pitching, et cetera. Does that more or less sound right?

• 19:19Speaker 04

  That's right, that's the deal today, uh, our deal was probably close to one-fifth of that.

• 19:24Barry Ritholtz?

  Oh, really?

• 19:24Speaker 04

  Yeah.

• 19:25Barry Ritholtz?

  Well, 10 years ago-

• 19:26Speaker 04

  Yeah, yeah, yeah.

• 19:27Barry Ritholtz?

  A lot has changed over the last decade.

• 19:29Speaker 04

  And, and, and they, uh, have done a great job, I, I, I think they have maintained, uh, their, um, I, I, I think the stat was since 2012-

• 19:41Barry Ritholtz?

  Mm-hmm.

• 19:41Speaker 04

  20% of the super unicorns- Were funded by Y Combinator.

• 19:45Barry Ritholtz?

  Wow, that's amazing.

• 19:46Speaker 04

  And then like second place is like 3% and plus or something like that.

• 19:50Barry Ritholtz?

  And this is like a full-on boot camp where it's three months and they are really taking you through the process. Here's how you build a startup. Here's how you iterate. When you first joined YC, did you have any idea what the final product of Vest was going to be? Or did that experience clarify where you wanted to go?

• 20:11Speaker 04

  There were certain, um, we went in with the idea of buffers and downside protection. There were start certain pivots as far as like, hey, what's the best delivery vehicle to start with?

• 20:22Barry Ritholtz?

  Meaning an ETF as opposed to an SMA?

• 20:25Speaker 04

  Yeah, exactly, exactly. But that was the foundational, uh, if you even look at our application, our pitch, it was exactly talking about the need for downside protection, uh, the need to, you know, fix liquidity and credit risk and other types of instruments. Those were kind of the foundational problems because YC always says that like make something that people want and then don't just come up with the ideas. Start with the problem.

• 20:49Barry Ritholtz?

  You're solving for a specific problem.

• 20:51Speaker 04

  And the problem needs to be painful enough. And so anybody out there that's ever thinking about starting a startup, always start with the problem first and make sure the problem is painful enough for your customer that that becomes, uh, you know, how you solve it can change a little bit, but the problem always existed and we thought that that was a, a noble problem to, and, uh, a painful enough problem to, to seek.

• 21:17Barry Ritholtz?

  That's a very customer-focused approach to building a business. I don't, I don't know if Wall Street necessarily thinks in those terms. There tends to be an attitude of this is how it's been. It's been successful. Why do you think you're smarter than everybody else, smarter than the market? Like, that's the sort of pushback you've gotten, um, and that you tend to get when you roll out a different approach. Uh, how has the experience been marrying the Wall Street ethos where failure is abhorrent?

• 21:51Speaker 04

  Yeah.

• 21:52Barry Ritholtz?

  And the Silicon Valley, um, mindset, which is, hey, failure just gets you to the solution. It's just one more step.

• 22:00Speaker 04

  And that's where kind of the ethos of our Silicon Valley meets Wall Street is that we live in both worlds. Like, our background, me and Koran's are Wall Street backgrounds. That, uh, that there is no move fast and break things mentality on our Wall Street ethos. Right? It is, uh, measure four times, cut once. This is people's livelihoods, their, their wealth. Um, so that part, we did not adopt. Not like break things type mentality. That is not-

• 22:32Barry Ritholtz?

  It's hard to do that when you're a highly regulated industry.

• 22:35Speaker 04

  Exactly, exactly. Second, is that we also realized you can't do this alone. It's not like we're starting an Airbnb where we can just kind of do X, Y, and Z. We needed partnerships. We needed, uh, like coming back to the point of influence, like we needed people that really could help us with innovation. Hence, uh, we actually only have two investors. One is CBOE Global Markets, the Chicago Board Option Exchange, the largest option exchange in the world. Um, and First Trust, one of the largest ETF providers here, um, in the United States. That has been intricate in the ability to shape and mold the industry, um, just like even with the exchange, right?

• 23:10Barry Ritholtz?

  Wait, let me roll you back. You said you only had two investors.

• 23:13Speaker 04

  Now, today.

• 23:14Barry Ritholtz?

  Now, today. Alright, so, before we get there, let's, let's talk about the, the post Y Combinator experience. So they give you barely six figures for a small chunk of the company. They, they, uh, take you through a, a boot camp-

• 23:31Speaker 04

  Yeah.

• 23:31Barry Ritholtz?

  -that teaches you all these different things from focus on problem solving to iteration, to pitching investors.

• 23:38Speaker 04

  Yeah.

• 23:38Barry Ritholtz?

  Who were the early investors? Invest?

• 23:40Speaker 04

  Um, so we had, uh, our lead coming out of Y Combinator was First Round Capital. Uh, people aren't familiar, that's the company-

• 23:48Barry Ritholtz?

  It's a great name if you're doing venture investing.

• 23:50Speaker 04

  Exactly. Uh, they were one of the first investors in a small company called Uber.

• 23:54Barry Ritholtz?

  Uh-huh. So that worked out okay.

• 23:56Speaker 04

  Yeah, they got a lot of big wins, uh, there. Um, and after that, um, you know, we had kind of a party round of a lot of different, like, um, uh, angels and other, other smaller VCs. Um, but after that, that's when CBO came in and, and, uh, wanted a, a bigger stake in the firm. Um, but the whole YC experience was very much like the show Silicon Valley, right?

• 24:20Barry Ritholtz?

  Which I, which I just loved. So great.

• 24:23Speaker 04

  And to the point where- Like when we got to Y C, we rented a hacker house. By the way, the house that we rented was called Hacker House.

• 24:31Barry Ritholtz?

  Uh huh.

• 24:32Speaker 04

  And it was a one story building with like three bedrooms, not enough bedrooms for all of us that were working there. Uh, I think Karan had to sleep on the floor on a mattress for three months. And by the way, this is coming from being over a decade on Wall Street. Like we're now sleeping on the floor.

• 24:51Barry Ritholtz?

  Hey, there's nothing to do but get this done.

• 24:53Speaker 04

  Exactly. And this is why I say like sometimes like if a former trader on Wall Street ends up in Silicon Valley, they may end up in a dish because like you have to go four years, no pay, sleep on the floor. It's not fun where you're used to like wearing, uh, you know, suits and loafers, uh, on Park Avenue. It's a big shock to the system. But that's the thing is like, you know, at the same time, it's okay sleeping on the floor. It's better than sleeping on the ground when, when you're in the military, but that, that's the grit that you kind of go through, right?

• 25:21Barry Ritholtz?

  Coming up, we continue our conversation with Jeff Chang, co-founder and president of Vest, talking about his experiences at Y Combinator. I'm Barry Ritholtz. You're listening to Masters Business on Bloomberg Radio.

• 25:44Speaker 00

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• 26:51Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He is the co-founder and president of Vest. The firm manages $50 billion in ETFs that are described as outcome-oriented investing. Some people call them buffer funds. So you have this experience with Y Combinator. Any of that graduating class with you, you're still in touch with? Who else were?

• 27:21Speaker 04

  Oh, yeah. So I'm not sure if folks out there know GitLab.

• 27:25Barry Ritholtz?

  Oh, of course.

• 27:26Speaker 04

  Sid was our group.

• 27:29Barry Ritholtz?

  No relationship to GitHub, which predates that by a long time.

• 27:32Speaker 04

  Yeah, but GitLab was our, I think they IPO'd on the NASDAQ, I think, over $5 billion or something like that. They're doing really well. There was EquipmentShare was also our batch. A lot of big winners in our, and by the way, you've probably been to college where you go into a lecture hall, right? And you have your first day of class, the first day of YC, you know what they tell you? They're like, you know, 4% of you guys in this room will be billionaires.

• 28:02Barry Ritholtz?

  Right. No intimidation factor at all?

• 28:06Speaker 04

  By the way, that's the math, right?

• 28:07Barry Ritholtz?

  Right.

• 28:07Speaker 04

  On average, it's a 4%. I think right now it's like 5% to 6% unicorn rate. But how many classes can you go through that, like, you're like, hey, 4% to 5% of you guys are going to have extremely successful companies coming out of this class. And by the way, you look around, you're like, oh, man, is that really possible? And then you blink 13 years later, you're like, wow, it really did happen. Like, there's incredibly successful firms and incredibly successful people. You look back and like even now, I look at my group partners, I look back. My group partners were incredible. I had Gary Tan, founded Initialy's, and also is now the present CEO Y Combinator, Alexis O'Hanlon, founder Reddit, Justin Khan founded Twitch,

• 28:50Speaker 04

  Kat Melanek, who was like an all-star in marketing and PR. Like, I had an all-star group.

• 28:57Barry Ritholtz?

  Yeah, no, definitely, definitely sounds like it. We're talking about winners, but Silicon Valley wears losers like a badge of pride.

• 29:06Speaker 04

  Yeah.

• 29:07Barry Ritholtz?

  Like, it's, hey, this is what's expected, which is very different than the way the East Coast tends to approach things. Tell us about that not being afraid to fail, not being afraid to try things, iterate, and take, this doesn't work, let's go with that. How different is that experience on the West Coast than what you experienced on Wall Street?

• 29:32Speaker 04

  Yeah, I mean,

• 29:35Speaker 04

  definitely, in Silicon Valley, failure is okay. They have a saying, if you're gonna fail, fail fast. Right? Whereas, I feel like on Wall Street, it's like, you don't want to fail fast. Like, that's called a blow up. Right? So, there are some parts, given the industry that we're in, we have to ignore some of the the aspects of it. I think everything that we did, I wouldn't say was ultimate failure, maybe not the success that we wanted, because we wanted to make sure everything we built were strong in foundation. Right? It would, like, last, stand the test of time, no matter what happened. Maybe not wildly successful, but then that's how you pivot. So, it's not necessarily

• 30:16Speaker 04

  failure, per se, but not the success you're looking for. Then pivot and try to find other ways to deliver and how to solve the problem better. But, I still think that the idea of of not being afraid of failure, and that grit, and the ability to, you know, pick yourself up, it's that attitude that, like, you know, this is not the end. Failure is just the the mother of success, and you just have to keep learning from those mistakes, because everything is a learning process. I can't tell you one person that I know that's successful that has not failed.

• 30:50Barry Ritholtz?

  No, that makes perfect sense. You know, you don't know what's going to work and you don't know what's not going to work until you try.

• 30:57Speaker 04

  Yeah.

• 30:57Barry Ritholtz?

  And if, you know, there's a story about, hey, if you're not failing occasionally, then you're just not taking enough risk.

• 31:05Speaker 04

  Yeah.

• 31:06Barry Ritholtz?

  To say the very least. All right. So let's talk a little bit about how this developed. You come out of Y Combinator sometime in 2015. When did you first start taking client assets, client money?

• 31:21Speaker 04

  Well, NYC, we were taking client assets. I think we launched our first mutual fund in 2016. It was the first buffer fund of its kind. And then...

• 31:33Barry Ritholtz?

  So wait, let's stay with mutual funds, which have their own complications with capital gains tax.

• 31:40Speaker 04

  Sure.

• 31:41Barry Ritholtz?

  Given what you do primarily with derivatives and options in order to create that buffer, how does that play out in a mutual fund wrapper?

• 31:50Speaker 04

  Yeah, there are obviously challenges that may not be as, let's say, the same as like an ETF that, you know, in 2019, they introduced the in-kind. This is also another example of the partnership with CBO.

• 32:06Barry Ritholtz?

  It's been around for real estate for forever, it seems.

• 32:10Speaker 04

  That's right.

• 32:10Barry Ritholtz?

  And it just took Wall Street a while to catch up to that. Explain what in-kind creation and redemption looks like and what it means to you.

• 32:19Speaker 04

  So in mutual funds, there's a challenge in some cases that if there's a redemption, you would sell your securities, which could have the potential to realize gains. In ETFs, not just unique to these ETFs or all ETFs, they have the ability to, let's say, in-kind securities. So when someone wants their money back, instead of giving the market maker, selling securities and giving them cash, in some cases, you can give them securities, thereby not potentially realizing the gain for the shareholders. So it has the potential for tax efficiency by having in-kind. Now, prior to 2019, October of 2019, that was not...

• 33:04Speaker 04

  We weren't able to do that with options. That was introduced in October 2019, so we launched our first buffer ETFs in November of 2019 in partnership with our partners at First Trust. And so that has been one of the fastest growing areas, not just for our firm, but as the ETF industry as a whole.

• 33:25Barry Ritholtz?

  So, so let's talk a little bit about what a buffer fund does. What are the advantages? What are you giving up in order to obtain those advantages? What's the largest fund? What's the largest ETF now at Vest?

• 33:40Speaker 04

  So, the largest buffer fund and the one at Vest is BUFR. And it's

• 33:46Barry Ritholtz?

  Good ticker.

• 33:46Speaker 04

  Yeah. It's built on the foundation that, you know, the, the kind of fundamentals of the strategy is the buffer strategy, which is, you know, let's say you get S and P exposure for one year, the first 10% is protected. So, as an example of strategy, if S and P is down 10, you're flat for the year. And then you get upside up to, let's say, a predetermined cap. So, let's say S and P is up 15, you're up 15. But the most you can make is 15. So, if S and P is up 16, you're up 15, right? So, you're capped out at that 15%.

• 34:20Barry Ritholtz?

  So, years like 23 and 24 are kind of unusual. You don't usually see 25% two years in a row. But if you were in the fund in 22, down 22%

• 34:33Speaker 04

  Yeah.

• 34:34Barry Ritholtz?

  Means you're only down 12%.

• 34:35Speaker 04

  That's right.

• 34:36Barry Ritholtz?

  Is that right?

• 34:36Speaker 04

  That's right.

• 34:37Barry Ritholtz?

  So, that's the trade off.

• 34:38Speaker 04

  Yeah. And the, and here's the thing is that most people don't realize these strategies have the potential to outperform the market, even if you're talking about, you know, high double digit equity returns. Because think about this, in 2022, because of inflation, when interest rates went up, stocks and bonds both went down at the same time, right? You could have mixed your stocks and bonds any way you wanted in 2022.

• 34:58Barry Ritholtz?

  60-40 was negative in 2022.

• 35:01Speaker 04

  Exactly. And unless you were managing money 40 years ago, you had not experienced inflation, right? And you couldn't hide anywhere. I mean, you, you were like Tom Brady choosing between alimony and child support while taking your kids to jujitsu practice.

• 35:14Barry Ritholtz?

  Right.

• 35:15Speaker 04

  Like, the thing is, there was nowhere to hide, right?

• 35:17Barry Ritholtz?

  Right.

• 35:18Speaker 04

  Whereas if you were hedging, and the great thing about hedging is if you buy S and P and you buy an S and P put, that put is perfectly negatively correlated to S and P.

• 35:27Barry Ritholtz?

  Right.

• 35:27Speaker 04

  It's like buying insurance.

• 35:28Barry Ritholtz?

  It's an inverse.

• 35:29Speaker 04

  Exactly.

• 35:29Barry Ritholtz?

  Right.

• 35:30Speaker 04

  And so, imagine if

• 35:33Speaker 04

  You had a strategy that did not participate in the majority of the drawdowns in 2022. That means you had more to invest to take advantage of the gains in 2023, 2024, and 2025. This is the compounding effect of winning without losing, right? It's the compounding effect of playing offense and defense at the same time. Because the end of the day is, a lot of times, you know, these types of strategies are not the get-rich game. If you're 20 years old, probably not the strategy for you. But, you know, in our industry, a lot of the people that have wealth, they're in the stay-rich game. Right. These types of strategies are in the stay-rich game. Because if you have wealth, you just don't want to be poor, right?

• 36:14Speaker 04

  So that's why, that's the kind of crux of protecting your equity exposure. And the idea is, the issue with hedging has always been that to hedge with options and so on and so forth. One of the biggest, and they had surveys on why, you know, investors and financial advisors don't hedge with options. And they, everybody said the same two things: compliance and scalability. You know, the compliance burden associated with trading options and scalability. Because when you buy a fund, you buy a stock, you could put it in your portfolio, fall asleep for 30 years. Maybe you rebalance once a quarter. You buy an option, every 30 days, 60 days from now, you have to trade it. By having it inside a fund, we can trade that for you. And so now you can asset allocate, rebalance once a quarter.

• 36:58Speaker 04

  It solves a lot of those issues. And this is the thing that I find very interesting is, two things. Number one is, these strategies have been around for over 30 years. The buffer structure note has been around for years. Buffer annuities, I think, were introduced in 2010. All we did was cut the bank and insurance company out. Like, instead of having the bank or insurance company hedge themselves with options, and then issue you a policy or issue you a no, we just said, why not just put the hedge in a fund and now you own it? We cut the middleman out of the middle. The other component is to think about in business. That I always look back. So Richard Thaler, the professor at University of Chicago, won the Nobel Prize for Behavioral Finance, right?

• 37:41Barry Ritholtz?

  Essentially created the field.

• 37:42Speaker 04

  Yeah, the nudge. And I believe one of the studies by Cornell University had this study of, I think they had kids in the lunch line. They gave them free apples. Like you get the end of that, you get a free apple, right? By the way, the consumption was like less than like, I don't know, 20%. Like it was a very low consumption rate. No one took the apple. Then they cut the apples up and they put them in little bags. By the way, the consumption went through the roof. Why? This was the nudge. This was the idea that you make it simple, people will use it. Think about options as apples. And then that we had bagged those apples to make it easier for the user to consume them without the compliance and scalability burden to them. Because theoretically, any broker or

• 38:27Speaker 04

  any financial advisor out there can actually trade those themselves. But that's like the same thing. Like every child could sit there and cut their own, slice their own apples, but they don't want to do that.

• 38:37Barry Ritholtz?

  So let me ask you, because you've brought this up a few times, and I want to hone in on this. Is your target consumer mom and pop Main Street investors? Or are you focused more on the advisor channel or brokerage channel? Or all three? Some combination?

• 38:56Speaker 04

  We are not that focused in the retail space. Mostly, and by the way, I would say 100% of our focus is in financial professionals.

• 39:06Barry Ritholtz?

  Really?

• 39:08Speaker 04

  Because that, those are our partners. Those are our, the people that we stand side by side with. We build products that, those are the people, we're solving problems for them, which they're solving problems for their clients. We stand side by side with the financial professionals that manage, you know, the...

• 39:29Barry Ritholtz?

  And once you bring them up to speed, it's incumbent on them to find the clients that think are the right fit for this and they get to explain that.

• 39:38Speaker 04

  Exactly, because every single client is different and unique. We make products across and every client is different and how that gets utilized. We help the financial advisor even, you know, how to best build and achieve their clients' investment objectives. But as far as the end client, that's typically not our customer.

• 39:59Barry Ritholtz?

  So I mentioned 6040 earlier. Does a buffered fund act as a substitute for 6040? In other words, if you own, whether it's 6040, 7030, you own bonds for income of which there hasn't been a lot over the past 15, 20 years, but also as a non-correlated asset with equity, other than 81 and 2022, does this, and it offsets the volatility and drawdowns in equities, do buffered funds behave similarly to a 6040? Is that the thinking?

• 40:35Speaker 04

  I wouldn't say similarly. Let me give you a kind of a, how we think about it. So if you look at, let's say, a strategy of a 10% buffer on S and P, in fact, you know, there are indexes out there that track these. If you compare that to, let's say, like a BlackRock 6040 portfolio, you actually notice the standard deviation is almost identical. The volatility is very similar, right, over the long term. But the source of the risk management is different, right? You're actually hedging. You're not hoping that the correlation between stocks and bonds, the negative correlation is there that, you know, when my stocks go down, I hope my bonds go up, kind of situation, right?

• 41:16Barry Ritholtz?

  Well, historically, they do most of the time. They didn't in 2022, they didn't in 1981. You know, so it's every 40 years or so, we seem to get this headache.

• 41:27Speaker 04

  With inflation at, you know, 3%, what happens if inflation rears its head again?

• 41:32Barry Ritholtz?

  The next rising, you'll end up with the same issue the next time we see a serious setup.

• 41:39Speaker 04

  And this is why we say, why not diversify your risk management and hedge? So if I have a hundred dollar portfolio and let's say I have sixty dollars in equity, forty dollars in fixed income. And let's just say I take ten bucks out, I put six, uh, take six from equity, four from fixed income. I put it into, let's say, a ten percent buffer strategy in S and P. Perhaps the standard deviation of the portfolio could be very, very similar. But notice the source of your risk management has changed. You've introduced hedging as the source of your risk management without the compliance, without the, uh, uh, trading scalability issues of options. You've introduced hedging as the source of risk management if inflation were to rear its head. Because the thing is, this is what everybody needs to ask themselves.

• 42:23Speaker 04

  If inflation were to come back, right? Which is a very, is not a, is very, there's a

• 42:30Barry Ritholtz?

  It's a non-zero possibility and way above that.

• 42:33Speaker 04

  Yeah, exactly. What in your portfolio is going to save you if 2022 repeats itself? That's the question everybody needs to ask. I always get the answer commodities. Great commodities, it's a timing trade.

• 42:48Barry Ritholtz?

  Right.

• 42:49Speaker 04

  You can get in, it'll work, but when it's not inflationary, what happens to that trade? I, I mean, I'm not smart enough.

• 42:55Barry Ritholtz?

  That gold didn't do great in 21 or 22.

• 42:59Speaker 04

  Yeah.

• 42:59Barry Ritholtz?

  It's only in the past few years where it's really exploded higher.

• 43:03Speaker 04

  That's right, that's right. So, um, I'm not smart enough to time that trade. And that's the great thing about these types of solutions is you don't have to time the trade, right? Like, uh, you're diversifying your risk management through just hedging. And like I said, repeated again, this is the stay rich game, right? How do we protect wealth? Um, not, not like make exorbitant amounts of it, but protect wealth and, and, and get a, a decent return, uh, from, from people's wealth.

• 43:32Barry Ritholtz?

  So Buffer is 10% hedged on the S and P 500. Tell us about some of the other ETFs you guys run.

• 43:39Speaker 04

  So one of the kind of overall themes that we've seen in the market is, you know, two things that really people are looking for is downside protection. But the other one is income generation. As the boomers are in retirement, the need for yield has really shown how high it is. I mean, if you look at the derivative income space, I think in 2018, Morningstar was ranked 58th. Last year is ranked ninth in flows, right? People are looking for income. And as volatility goes up, just like strategies like writing cover calls are extremely, it's another way to derive yield by monetizing volatility in different asset classes. You could do it in gold. You can do it in Bitcoin. You can do it in equities. You can do it in fixed income.

• 44:24Speaker 04

  And that's the thing is people were always thinking one dimensionally that like the innovation is always about thinking three dimensionally when everybody else is thinking in two dimension. Right? This is why we have, you know, built strategies to derive income from, you know, not just equities, but fixed income, but for, from gold, from Bitcoin, from any asset class.

• 44:47Barry Ritholtz?

  So give us a few ETFs that are primarily income focused.

• 44:51Speaker 04

  Yeah, so one of our biggest ones is K and G, which tracks the dividend aristocrats. RDVI, which tracks the dividend achievers. These all provide, you know, attractive level of yield. I think.

• 45:07Barry Ritholtz?

  So dividend aristocrats tend to be high dividend, low price. They tend not to be high PE companies. So they're fairly stable. Is that?

• 45:18Speaker 04

  Yeah, so the companies that have grown their dividend is created by S and P back in 2005. Companies that grown their dividend for 25 consecutive years.

• 45:25Barry Ritholtz?

  Wow.

• 45:26Speaker 04

  And these are dividend growers. They're not dividend payers. So they typically, I believe, you know, yield less than 2%. But they've grown their dividend for 25 consecutive years. So for a company to grow their dividend for 25 consecutive years.

• 45:39Barry Ritholtz?

  That's a stable business.

• 45:40Speaker 04

  Yes. And it has to cash flow. It's not a PE play, right? For all intents and purposes. It is companies that have to have strong notes. And the other thing that people miss is good corporate governance. Cause who makes dividend policy? The board. For a board to never cut a dividend for 25 years, it actually was a filter for good corporate governance. Now.

• 46:02Barry Ritholtz?

  And that stock symbol is, that ETF symbol is?

• 46:05Speaker 04

  KNG.

• 46:06Barry Ritholtz?

  KNG?

• 46:07Speaker 04

  Yep.

• 46:08Barry Ritholtz?

  And, and you guys generate additional income on that with cover call writing?

• 46:14Speaker 04

  That's right.

• 46:14Barry Ritholtz?

  So if it's a 2% yield, what do you actually?

• 46:17Speaker 04

  So we are, uh, our distribution yield is probably, uh, in the past year, uh, over 8%.

• 46:23Barry Ritholtz?

  Really? That's a big number.

• 46:25Speaker 04

  And we're on average, I believe, covering around 20% of every single name. So, you know, if I have 100 shares of Walmart, I'm writing in at the money call and let's say 20 of those shares of the, as an example, uh, to achieve that target income. So, uh, one of the things that core beliefs that we have when writing, um, cover calls is like, one of the biggest drivers is stock selection. You pick good stocks, you get good results, right? While, you know, the aristocrats, they don't have the high-flying Mag7 names.

• 46:52Barry Ritholtz?

  Right.

• 46:53Speaker 04

  But definitely as you look forward into the windshield, these are really going to be the names as the market bronze out, right? Like, I really do think in the next year, you're really looking at kind of a barbell approach where you, yeah, you have the Nvidia's and the, um, uh, in the high, uh, hyperscalers in your portfolio, but you really need to have the strong staples, that cash flow.

• 47:15Barry Ritholtz?

  What are, what are some of the names in KNG?

• 47:18Speaker 04

  Uh, well, you got like Chevron, Walmart, like you're really blue chip names, uh, that are there. I mean, look at Chevron, they, they, they have the potential to be, you know, one of the beneficiaries of, uh, uh, oil in Venezuela, right? Like they were, they were there before. Um, and these are the cash flowing like crime, uh, like companies that like, like I said, grown their dividend for 25 second years. These are strong, strong names that are out there.

• 47:44Barry Ritholtz?

  Do you, do you do anything with fixed income on the yield side as well?

• 47:47Speaker 04

  Yeah. So, um, we have, uh, cover calls on high yield, tracking HYG gives you also, uh, I believe a double-digit distribution yield. Uh, only covering about, you know, 20 to 25% of the portfolio. So you're still getting over, you know, on a weekly basis 70%.

• 48:05Barry Ritholtz?

  And what's that ETF symbol?

• 48:06Speaker 04

  Uh, HYTI, Heidi.

• 48:09Speaker 04

  Yeah, and

• 48:12Barry Ritholtz?

  And what about, do you do anything on the commodity side?

• 48:14Speaker 04

  So we have gold, IGLD, so you know, biggest non gold has been a hunk of metal since your portfolio doesn't do anything. Now you can monetize the volatility and have, you know, potentially

• 48:26Barry Ritholtz?

  Same process, covered call, write in.

• 48:28Speaker 04

  Exactly.

• 48:28Barry Ritholtz?

  So this is why CBO is a partner with you guys. How does that relationship help you manage all of this option writing, all this call activity?

• 48:40Speaker 04

  That's a great question. So let's take IGold as an example, right? Prior to that fund, GLD options stopped trading at 4 o'clock. By the way, this is one of the reasons why CBO partnered with us is how do we solve certain issues in the option market for the construction of funds? Right? If options stop trading at 4 o'clock and I need to know the close, I can't create an ETF on that. Right? S and P options, SPY options, they trade, they close at 4:15. Today, GLD options stopped trading at 4:15. By the way, that's a really cool statement to say that the entire street trades GLD options that extra 15 minutes because we wanted that.

• 49:25Barry Ritholtz?

  That's great. Because you have to take the closing price at 4 and then use it for an in the day hedge.

• 49:32Speaker 04

  We need that option market to be open that extra 15 minutes. And by the way, that, those products by First Trust Invest are the reason why we have an extra 15 minutes to trade GLD options. So if you're, you're late and you're trading at 4:05, that's us.

• 49:48Barry Ritholtz?

  And option trading is so much more complicated, so much more difficult. Like you, I started on an equity desk, but have always been a little bit of a, an option junkie because it's so fascinating. And most people use, don't use options correctly. They're just making like a lottery ticket bet, which tends not to be smart. You guys are using options for a very specific purpose to achieve what you describe as a defined outcome.

• 50:19Speaker 04

  Solving a problem.

• 50:21Barry Ritholtz?

  Solving a problem.

• 50:22Speaker 04

  Starting with the problem.

• 50:23Barry Ritholtz?

  Really interesting.

• 50:23Speaker 04

  Yeah.

• 50:24Barry Ritholtz?

  Coming up, we continue our conversation with Jeff Chang, co-founder and president of Vest. I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio.

• 50:46Speaker 01

  Running a business means keeping pace with the latest tech. You put a lot into building your enterprise software stack, and scrapping it to integrate AI is out of the question. That's why IBM Technology works with all the apps, data, and models you need. It's another way IBM helps you build on the technology you rely on. Let's create smarter business. IBM. Visit ibm.com to learn more.

• 51:17Barry Ritholtz?

  I'm Barry Ritholtz. You're listening to Masters in Business on Bloomberg Radio. My extra special guest this week is Jeff Chang. He's president and co-founder of Vest. The firm specializes in outcome-oriented investing via primarily ETFs, then run over $50 billion in assets.

• 51:37Speaker 04

  Yeah.

• 51:38Barry Ritholtz?

  Before I get to my favorite questions, I want to ask any... So we've covered stocks, bonds, commodities. You mentioned crypto. What are you doing in terms of crypto and generating additional defined outcome results using derivatives?

• 51:55Speaker 04

  Yeah, so we have a strategy, also target income, almost, I believe, about an 18, 19% yield, and you're still only covering about 20%. So that strategy tracks Bitcoin. So you can get on a weekly basis, let's say, 70, 80% of the upside in Bitcoin, and then really high, almost 20% yield by monetizing the volatility. It's the same thing, because just like gold, some of the knock is that it just sits in my portfolio, doesn't do anything, and the value...

• 52:28Barry Ritholtz?

  Well, no one can say that about Bitcoin. It's always doing something, either going up or going down.

• 52:32Speaker 04

  Yeah, exactly.

• 52:32Barry Ritholtz?

  And what's the ETF symbol for that?

• 52:35Speaker 04

  IBIT.

• 52:36Barry Ritholtz?

  Uh huh.

• 52:37Speaker 04

  I'm sorry, I'm sorry, not IBIT.

• 52:38Barry Ritholtz?

  That's BlackRock.

• 52:39Speaker 04

  Yeah, yeah, yeah. DFI, D-F-I-I, that's right.

• 52:42Barry Ritholtz?

  D-F-I-I. And so that's... Uh, options, how much of the upside, how much of the downside do you get and give up? Or is it just geared?

• 52:53Speaker 04

  We're just writing cover calls on to target, uh, you know, a specific yield. Like, like I said, I think anywhere from we're covering every week about 20 to 25% and at the money.

• 53:03Barry Ritholtz?

  How often do those roll?

• 53:04Speaker 04

  Every week.

• 53:04Barry Ritholtz?

  Every week?

• 53:05Speaker 04

  Every Friday, yeah. The reason why we like weeklies, um, is that, uh, when you sell a call, you want the premium to go to zero.

• 53:15Barry Ritholtz?

  Right, that's right.

• 53:15Speaker 04

  And that, uh, decay accelerates in that last week if you're selling a monthly option. So if you like do it four times a, a month, you, you, you have the potential to generate more yield because you're always capturing that extra decay. It's like, it's like football tickets, right? Like you ever go on StubHub like game times at one o'clock, um, and you, you, you go on StubHub at 12, the ticket starts to drop like a rock. Imagine if you kept tracking that and you, you made money off that, that, that drop, right? Um, and everything kind of follows that. That, in fact, there's actually only one thing that doesn't follow that. You know what that is?

• 53:49Barry Ritholtz?

  Go on.

• 53:50Speaker 04

  Giants tickets, they decay before the season starts.

• 53:54Barry Ritholtz?

  Well, um, as a guy who used to be in New Jersey, for sure.

• 53:58Speaker 04

  Um, or Jets tickets, actually both of those are anomaly.

• 54:01Barry Ritholtz?

  So really, so in other words, bad assets don't generate good option returns. That, that's pretty reasonable. Um, how often do things get called away? That's obviously the risk when you're writing calls. Uh, how, how do you manage around that? How frequently is that built into your models?

• 54:19Speaker 04

  I mean, that can happen pretty frequently, but here's the deal, like, like think about this, and this is just a concept of, of, of, uh, let's say I collect a $2 premium and the stock goes up $1.

• 54:33Barry Ritholtz?

  You're good.

• 54:34Speaker 04

  Yeah, I made a, a dollar, but it still got called away, but I still made a dollar. I just buy the stock back or however, however way I deal with the assignment depending on the, the strategy. So the idea is as long as the stock doesn't go above the premium if I'm writing out the money or what, what I've actually.

• 54:50Barry Ritholtz?

  It gives you a buffer to repurchase the stock, not at a loss.

• 54:54Speaker 04

  Exactly, and, and this comes into. What we call about the implied versus realized premium, meaning options. If I look historically of a particular asset, whether it be a stock or a commodity or whatever, and it historically moves X, I'm not going to sell the premium at that number.

• 55:13Barry Ritholtz?

  Right, it's got to be X plus.

• 55:15Speaker 04

  Plus, right? Just like when you sell car insurance, like if my expected loss is a thousand dollars, I'm not going to sell the premium for a thousand. I'm going to sell it for twelve hundred dollars to make two hundred, right? That extra little bit.

• 55:26Barry Ritholtz?

  Right.

• 55:27Speaker 04

  So in options, they have what's called the implied versus realized premium. And so that's really kind of where you're trying to capture is the implied volatility versus what the realized volatility, and you're hoping that the implied will be greater than the realized. I mean, that's the hope in options, especially when you're selling them, right? I think there's a stat that like, you know, sixty percent or seventy percent of the time, the person selling the option wins the trade, right?

• 55:52Barry Ritholtz?

  Right, most, you know, old option traders don't die, they just expire worthless.

• 55:56Speaker 04

  Yeah, exactly.

• 55:57Barry Ritholtz?

  Desk joke, but, you know, if you're a writer of options, you're making a very specific bet.

• 56:02Speaker 04

  Yeah.

• 56:03Barry Ritholtz?

  And if you're a purchaser of options, you're making a very different bet.

• 56:06Speaker 04

  Yeah, yeah. I mean, you see this, you know, in some cases of buying options, like you said, it can, you know, even Warren Buffett said there could be weapons of mass destruction. I mean, you can see these zero day options that people are buying.

• 56:18Barry Ritholtz?

  Yeah, that's become crazy.

• 56:19Speaker 04

  I mean, those are like scratch off lottery tickets. Right, who's buying them? I don't know. The kid in his mom's basement popping his pimples eating mayday sandwiches. I don't know.

• 56:27Barry Ritholtz?

  At one point in time, I imagine that there were market makers that had a hedge that for reasons that were complicated, they were stuck with overnight positions. Like, I almost understand that. But the day traders playing with these, this is FanDuel's and DraftKings, pure speculative nonsense.

• 56:48Speaker 04

  Yeah, exactly. So that's why we don't have anything in that space, but it is. Something to look at from afar.

• 56:56Barry Ritholtz?

  Huh, really, really fascinating stuff. Last question before I jump to my favorite questions. So you're constantly thinking about how do we hedge this position? How do we create a buffer? How do we define a specific outcome for clients? What do you think the average investor isn't thinking about relative to that approach? But, but perhaps should be. What, what do you think most people are kind of missing or not paying enough attention to? Um, and, and it could be a geography, it could be a policy, whatever. But you, you're obviously thinking about a lot of things differently than the typical index purchaser. What are we missing?

• 57:39Speaker 04

  Yeah, I think, you know, while we've had a tremendous amount of growth in, in kind of the options base of downside protection and, and the income generation part. I think a lot of the market is still, um, I think, thinking two dimensionally in stocks and bonds. Right? Like, instead of just diversifying across, think about, you could still diversify, but think about other ways to shape your return. Right? Or, uh, thinking about income generation out of the equity portfolio. Think about income generation or boosting yield in your fixed income part of it. Uh, and then also, uh, thinking about risk management beyond diversification. There, while there is a lot of, a good part of the financial professional space that is picking up on this.

• 58:24Speaker 04

  I still don't think like we're just tip of the iceberg at this point. Right? That's on one, one standpoint. I think people are, are still missing. The second, um, I think is, uh, the, I think one of the biggest drivers of the market today, and no one would disagree, is AI. Right? However, that's not the part that people are, are, are missing. That You know, having been through the 2000s, I really feel like this is like 1999, 2000. Like, think about the stocks that were big then, right? Like, you had-

• 58:55Barry Ritholtz?

  Juniper Networks, Metro Media Fiber-

• 58:57Speaker 04

  ALOL-

• 58:58Barry Ritholtz?

  Right.

• 58:59Speaker 04

  Like, you guys remember Priceline?

• 59:01Barry Ritholtz?

  Global Crossing.

• 59:03Speaker 04

  Yeah.

• 59:03Barry Ritholtz?

  You know, a lot of these companies have been either absorbed into other companies and still- Priceline, Expedia, there's a through line there.

• 59:11Speaker 04

  Totally.

• 59:12Barry Ritholtz?

  How is Pets.com not chewy today? So, some of them were just a little early.

• 59:17Speaker 04

  Exactly. So, now, let me ask you, who won that trade? Facebook, Google, Netflix?

• 59:22Barry Ritholtz?

  Amazon.

• 59:23Speaker 04

  Amazon.

• 59:23Barry Ritholtz?

  Apple, Microsoft.

• 59:24Speaker 04

  A lot of those companies were private, or startups then.

• 59:27Barry Ritholtz?

  Google.

• 59:28Speaker 04

  Right?

• 59:28Barry Ritholtz?

  Yeah.

• 59:29Speaker 04

  Like, think about that. And I think that's the same, like, history doesn't repeat itself, it rhymes. I actually think a lot of the, kind of the hugely successful companies from AI are in startup mode. They're at Y Combinator. Ninety percent of the, uh, uh, almost eighty, ninety percent of the companies at YC are AI-driven. They have, I've seen an article recently, their month-over-month average for the batch is double digits. Meaning, their revenue is growing over ten percent month, uh-

• 1:00:00Barry Ritholtz?

  Month-to-month.

• 1:00:01Speaker 04

  Or, in some cases, week-over-week.

• 1:00:04Barry Ritholtz?

  That's unbelievable. I said to someone the other day, someone said, "Who's gonna dethrone Nvidia?" And I said, "The founder of that company hasn't graduated high school yet, but he's coming, or she's coming." He's not, it's not impossible. All right, let's, let's jump to our favorite questions that we ask all of our guests, starting with, who are your mentors who helped shape your career?

• 1:00:29Speaker 04

  Oh, that's a great question. Um, I would actually, uh, have to say my brother.

• 1:00:36Barry Ritholtz?

  Really?

• 1:00:37Speaker 04

  Yes. Um, and, uh-

• 1:00:40Barry Ritholtz?

  In what way?

• 1:00:41Speaker 04

  My, I have an older brother, he's four years older than me.

• 1:00:43Barry Ritholtz?

  Mm-hmm.

• 1:00:43Speaker 04

  Um, he's the overachiever, I'm the underachiever of the family.

• 1:00:47Barry Ritholtz?

  Okay.

• 1:00:48Speaker 04

  Uh, so, uh, my brother, I remember growing up, he was like the, uh, he was good at math and science. I would literally show up to class and they'd be like, oh, you're Bill Chang's brother. You must be smart. By the way, you know what that does to you as like

• 1:01:00Barry Ritholtz?

  A lot of pressure.

• 1:01:01Speaker 04

  Yeah, a lot of pressure. Um, so he went on, uh, he worked at Apple and then, uh, was at Tesla. Um, I think he was chief architect of the dojo, um, um, uh, dojo project. People, folks that aren't, um, uh, familiar with dojo, it's the AI system at Tesla that coded the self-driving, right? Um, he, uh, recently, and in fact, Bloomberg wrote an article about, uh, his firm Density AI that, uh, I think they are one of the, the first companies to really, uh, kind of take on, um, cause the dojo, I think, system is one of the, one of the more efficient ways that can take on Nvidia for the chip. So that's why it's funny that you said,

• 1:01:45Speaker 04

  like, hey, the person that's going to dethrone Nvidia may, may not, may still be in high school. I was like, yeah, he might just be four years older than me.

• 1:01:51Barry Ritholtz?

  Right. Or he could be, uh, deep into the process already.

• 1:01:56Speaker 04

  Yeah. So, um, uh, they recently, um, uh, like I said, like Bloomberg just wrote an article about them, uh, on Density AI. And he, he has been extremely like, a lot of times people ask, like, hey, did you work that hard? Cause your parents were, you know, like tiger parents? No, actually I was just chasing my brother the whole time. Uh, it was definitely a different dynamic. Um, and, uh, yeah, I couldn't be more proud of him. Uh, and, uh, a lot of times people are like, hey, what, what tea are the Changs drinking? Um, because we're, uh, but we get along great while we're, uh, competitive. We, we support each other, but he's been

• 1:02:34Barry Ritholtz?

  You're in different fields, so the competition stops at a certain point.

• 1:02:37Speaker 04

  He's in engineering. Uh, I'm in

• 1:02:39Barry Ritholtz?

  Financial engineering.

• 1:02:40Speaker 04

  Yeah, yeah, exactly.

• 1:02:41Barry Ritholtz?

  So similar, similar background. Let, let's talk about books. What are some of your favorites? What are you reading right now?

• 1:02:45Speaker 04

  Well, I said liar's poker was a very influential one. Yeah.

• 1:02:50Barry Ritholtz?

  Just had its 30th anniversary, I think, last year.

• 1:02:53Speaker 04

  I like, I thought was really good for me was the book Influence by Robert Cialdini.

• 1:02:59Barry Ritholtz?

  Fantastic.

• 1:03:00Speaker 04

  It was a great book. Kind of along with that, How to Win Friends and Influence People. I think those are great. I actually, in finance, one of my first ones was The Intelligent Investor by

• 1:03:11Barry Ritholtz?

  Ben Graham.

• 1:03:12Speaker 04

  Yeah, Ben Graham. Those are kind of cornerstones.

• 1:03:14Barry Ritholtz?

  Yeah, that's a great list.

• 1:03:16Speaker 04

  Yeah.

• 1:03:17Barry Ritholtz?

  I know you are on planes a lot.

• 1:03:19Speaker 04

  Yeah.

• 1:03:20Barry Ritholtz?

  When you're not reading, what are you streaming? What's keeping you entertained on these long cross-country flights? Either podcasts or Netflix or whatever?

• 1:03:28Speaker 04

  I do listen to podcasts, a master's in business. However, there's a new thing that I've been doing. Actually, it's not a book. All right, and it'll probably be, hit everybody differently on what I'm doing here.

• 1:03:45Barry Ritholtz?

  Okay.

• 1:03:46Speaker 04

  And I could tell you, I got this from a good friend of mine, and he's gonna kill me for saying this, so.

• 1:03:57Speaker 04

  A friend of mine, his name is Matt Bellamy, he's the lead singer to Muse.

• 1:04:00Barry Ritholtz?

  Okay.

• 1:04:01Speaker 04

  And he actually taught me this, so I can't take credit for this. We go into ChatGPT, and he actually sent me the prompt. And we prompt ChatGPT, tell me, in the last two weeks, what you have learned that is beyond human comprehension. Something along those lines.

• 1:04:17Barry Ritholtz?

  Really? How fascinating.

• 1:04:18Speaker 04

  And by the way, it spits out all this stuff. Because if you think about it, humans, like we, as a human, you could get a PhD in biology, you get a PhD in astrophysics, you get a PhD in chemistry. But like, you're the expert in their field. But think about this, that like, ChatGPT passed the bar exam in like, I don't know, like, a couple of weeks, right? So it's becoming experts in everything, and then it's combining all of those things together. So how many, like, PhDs in chemistry, astrophysics, do you have that like, have like, the expert in everything? And then what comes out? Like, you tend to learn so many things that like, by the way, it turns into this rabbit hole. And I noticed that my prompt actually, because I always tell it to me, like, explain it to me like I'm 16. So I've been driving into this other thing of.

• 1:05:04Speaker 04

  It's been teach me about quantum entanglement. Are you familiar with this?

• 1:05:08Barry Ritholtz?

  Of course.

• 1:05:09Speaker 04

  Well, I would like.

• 1:05:09Barry Ritholtz?

  Who isn't familiar with spooky action at a distance? I mean, they teach that in middle school.

• 1:05:15Speaker 04

  Yeah, exactly. So the the quantum entanglement of that you have two protons that, you know, if you do want to X, Y will do the same. It's just like having two dice. If dice on Earth, by the way, they've proven this. Like if you roll the the dice on Earth, it rolls a six, it'll definitely roll a six. And it's not bound by space and time. So basically, it could be light years away. You roll that dice, it rolls an eight, this one on Earth is going to roll an eight. And so then they sort of combine that with, is that part of human consciousness? That is your consciousness quantum entangled is what makes you you. By the way, this type of like thinking.

• 1:05:52Barry Ritholtz?

  There's there's a related topic, and I haven't run this through chat GPT, but I should. Um, which is the concept of emergence, intelligence emergence as the natural outcome of the universe. Why does the universe exist if not to create a conscious intelligence? Although the flip side of that is, um, life is fairly common throughout the universe. Hydrogen, carbon, oxygen, nitrogen. But advanced technological life so far at least appears to be exceedingly rare. So that's the counterbalance of of emergence.

• 1:06:31Speaker 04

  Totally.

• 1:06:31Barry Ritholtz?

  But, um.

• 1:06:32Speaker 04

  And then the other thing that I found recently that people can dig into, I think this is fascinating, is that your head experiences time different than your feet from the proximity of gravities.

• 1:06:45Barry Ritholtz?

  Well, certainly, we have to adjust GPS for the for the relative relativity.

• 1:06:51Speaker 04

  The GPS.

• 1:06:52Barry Ritholtz?

  Which which Einstein turned out to be right about.

• 1:06:54Speaker 04

  Exactly, so.

• 1:06:55Barry Ritholtz?

  But the difference between your head and feet.

• 1:06:57Speaker 04

  Oh, yes.

• 1:06:58Barry Ritholtz?

  Is so tiny unless.

• 1:07:00Speaker 04

  Yes.

• 1:07:00Barry Ritholtz?

  You're falling into a black hole and then spaghettification is is the problem.

• 1:07:05Speaker 04

  Yeah, so then you take quantum entanglement.

• 1:07:07Barry Ritholtz?

  Uh huh.

• 1:07:07Speaker 04

  And you then say, OK, if I have a proton here and a proton elsewhere and the light in the how that proton experiences time through entanglement. Versus how time bends with gravity. By the way, all of this just keeps going deeper and deeper and deeper.

• 1:07:26Barry Ritholtz?

  Way down the rabbit hole.

• 1:07:27Speaker 04

  And then, and then the thing is, is that I keep telling it to explain it to me like I'm sixteen. Now my entire prompt explains everything. I will explain it to you as if you're sixteen years old.

• 1:07:37Barry Ritholtz?

  So the, the issue I occasionally run into with perplexity or, or chat GPT is it tends to conform its output to you.

• 1:07:48Speaker 04

  Yes.

• 1:07:49Barry Ritholtz?

  And sometimes I'll ask a question and it's like, no, I don't want a list of ten podcast questions. I just, tell me about Jeff Chang and what led to Vest. Don't give me a podcast. I, I have my own questions.

• 1:08:00Speaker 04

  That's why I use multiple Grok, everything else. That way I get a, a whole plethora. And then what ends up happening is you get all this new stuff and then you dig deep into whatever topic. And I found that so fascinating because uh, I just, it's curiosity. It's like.

• 1:08:17Barry Ritholtz?

  If you're interested in these sorts of things, absolutely.

• 1:08:20Speaker 04

  And, and by the way.

• 1:08:21Barry Ritholtz?

  But you have to be on guard for the occasional hallucination.

• 1:08:24Speaker 04

  Oh, a hundred percent.

• 1:08:25Barry Ritholtz?

  And every now and then I find myself leaving um, AI to go to just traditional search and say, hey, show me a source for this. Is, is this?

• 1:08:35Speaker 04

  Yeah.

• 1:08:35Barry Ritholtz?

  I, I don't think before AI, I don't think people were skeptical enough about the sources of what they consumed. With AI, you really have to know what is real and what is fake. People, people miss that. All right, our final two questions. Um, what sort of advice would you give to a recent college grad interested in the career in asset management um, or, or ETFs specifically?

• 1:09:03Speaker 04

  Yeah, I think a recent college grad, I think similar to kind of bring it full circle, same thing. Like develop the skills that, you know, you're not beholden to anybody, right? Um, whatever that is, uh, whether you're in college or out of college, like develop those skills uh, that you can actually, that they're portable, one or the other. Uh, and then not be afraid of failure. Take chances. Now, this is not for everybody, I would say, you know, meaning not everybody is going to be a founder. Not everybody's going to be an entrepreneur, which I, by the way, I find as two different people. Founder has the creativity, an entrepreneur has the grit and influence. A founder has to have the creativity because you're, you're

• 1:09:48Speaker 04

  actually introducing a whole new industry or a whole new thing that somebody else has not seen yet, right? But that's the thing. And then also, keep your eye out for painful problems that you have the skillset to solve. So obtain those skillsets and then have your eyes out, eyes peeled throughout life, write them down.

• 1:10:09Barry Ritholtz?

  Look for pain points.

• 1:10:11Speaker 04

  Look for pain points, look for problems. And then the second, the last thing is just a personal thing is, don't take yourselves too seriously, right? Have fun with life. And, and I think that, that, that is, because otherwise, all this stuff can create massive amounts of burnout.

• 1:10:26Barry Ritholtz?

  And our, our final question, what do you know about the world of buffered funds, investing ETFs today, might have been helpful 15, 20 years ago when you were first getting started?

• 1:10:37Speaker 04

  How hard it would have been, right? Like, literally.

• 1:10:44Barry Ritholtz?

  Would that have discouraged you from launching?

• 1:10:45Speaker 04

  Yes, I think that was actually the superpower, right? Like, when you climb a mountain and you don't know how high it is, and there's a cloud base, if you saw it in a clearer view, it probably wouldn't be. If you told me to quit my job and I wouldn't get paid for four plus years, I probably wouldn't have done that. But then it's like always, success is always around the corner. At least you dream of it, right? Everybody sees what you are now. They don't see the pain where you're constantly just waiting for that cloud to clear on the next part of the mountain. Because I, I could tell you this, that like, if, if, if you saw how big the mountain is, it would be, nobody would do it.

• 1:11:23Barry Ritholtz?

  Really, really interesting. Thank you, Jeff, for being so generous with your time. We have been speaking with Jeff Chang. Co-founder and president of Vest. If you enjoy this conversation, well, check out any of the 600 we've done over the past 12 years. You can find those at iTunes, Spotify, YouTube, Bloomberg, wherever you get your favorite podcasts. I would be remiss if I didn't thank the Prox staff that helps put these conversations together each week. Alexis Noriega is my video producer. Sean Russo is my researcher. Anna Luke is my podcast producer. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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